- Bargaineering - http://www.bargaineering.com/articles -

How Are Credit Card Offers and Bank Promotions Taxed?

Ryan, on my Invest With Only $100 Experiences & Some Thoughts On Life [3] post, asks: “What are the tax considerations for the gains on these promotional bonuses. Say I receive a $100 bonus from a Bank of America account, and repeat this process 4 times in 2007, for a net gain of $400.” This led me to expand the question to include all those promotional offers and try to answer all of that in one shot.

Bank Promotional Offers

Bank promotional offers will almost always be considered interest and you’ll get a 1099-INT form in the mail – this will also almost always be indicated in the fine print for the promotional offer if you dig down deep enough. For example, ING Direct has a promotional offer where existing account holders can refer their friends. If the friend deposits $250, then the existing account holders earns $10 and the friend earns $25. When the transaction completes, the existing account holder will see that their “Interest Paid Year to Date” value will be $10 higher.

There are exceptions to the rule with bank promotional offers when it comes to product giveaways (a free toaster or an MP3 player) in that sometimes some banks will put the full retail value as earned interest and sometimes they won’t list it at all. I’ve had promotional offers of product where the product value was never reflected in a 1099-INT. When in doubt, as the institution as to what their policy is.

Credit Card Promotional Offers

These are the “get $100 statement credit after your first purchase” or “10,000 reward points after your first purchase” offers that have been popular as of late with credit card companies and these promotions are usually not considered income and thus aren’t taxed as income. You can treat these like cash back promotions, 5% cash back on purchases at gas stations and grocery stores, in that you aren’t “earning” money, you’re just billed less for purchases that you’ve made. In the past there has been discussion of considering the cash back as “income” but I think those discussions have pretty much died. So if your credit score can handle it, go get some free money from the credit cards [4].